Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this Form 10-K for the fiscal year ended December 31, 2015. PAGP has no material operating business separate from Plains All American Pipeline, L.P. (PAA): it controls PAA through Plains AAP, L.P. (AAP), and its cash generation depends on distributions flowing from PAA through AAP. Accordingly, the consolidated results below largely reflect PAA and its subsidiaries.
Financial performance and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $23.152 billion | $43.464 billion |
| Operating income | $1.258 billion | $1.791 billion |
| Net income | $809 million | $1.328 billion |
| Net income attributable to PAGP | $118 million | $70 million |
| Basic net income per Class A share | $0.53 | $0.48 |
| Operating cash flow | $1.333 billion | $1.988 billion |
| Cash used in investing activities | $2.530 billion | $3.296 billion |
| Total debt | $11.931 billion | $10.525 billion |
| Cash and cash equivalents | $30 million | $404 million |
Operating margin was approximately 5.4% in 2015 versus 4.1% in 2014. The filing’s defined gross margin was $1.539 billion versus $2.122 billion. Revenue fell sharply largely because lower commodity prices reduced reported supply-and-logistics sales and related purchases; revenue is therefore not directly comparable to fee-based earnings.
For the fourth quarter, revenue was $4.996 billion, operating income $343 million, net income $216 million, and net income attributable to PAGP $25 million. Basic and diluted earnings per Class A share were $0.11. In Q4 2014, the comparable figures were $9.459 billion, $529 million, $370 million, $24 million, and $0.14 per share, respectively.
Segment profit was $1.877 billion, down 18% year over year: Transportation $917 million (down 1%), Facilities $579 million (down 1%), and Supply and Logistics $381 million (down 51%). Transportation tariff volumes increased 10%, while supply-and-logistics total volumes increased 1%; margins in that segment weakened materially.
PAA reported approximately $2.2 billion of adjusted EBITDA and $1.5 billion of distributable cash flow, slightly below revised guidance. Distribution coverage was approximately 88%. PAGP distributions declared for 2015 totaled $0.883 per Class A share; the Q4 distribution was $0.231 per share, paid in February 2016.
Material changes versus the prior comparable period
- Consolidated net income declined 39%, and operating income declined 30%. PAGP-attributable net income rose from $70 million to $118 million, reflecting the allocation between PAGP and noncontrolling interests.
- Supply and Logistics segment profit fell $401 million, primarily from compressed differentials, increased competition and lower unit margins amid excess infrastructure capacity. Crude oil prices also reduced inventory values.
- Transportation and Facilities segment profit was broadly stable. Transportation volumes grew, but Line 901 downtime reduced Western-region activity; natural gas storage rates and hub-service opportunities remained weak.
- Operating cash flow declined $655 million. Capital spending remained substantial: expansion capital was $2.170 billion, with total acquisition, expansion and maintenance capital of $2.495 billion.
- Total debt increased by $1.406 billion, while cash fell to $30 million. Working capital was in deficit by $437 million at year-end.
Outlook, risks, contingencies and unusual items
- Management described 2015 and the near-term outlook as challenging: lower oil prices, reduced producer investment, slower or declining production in some areas, compressed differentials and overbuilt midstream capacity may constrain volumes, margins and distribution growth.
- PAA expected 2016 expansion capital of $1.4–$1.6 billion and maintenance capital of $190–$210 million. Management said most 2016 project spending was expected to contribute to growth in 2017 and beyond.
- In January 2016, PAA raised approximately $1.6 billion net through a private placement of about 61 million Series A convertible preferred units. The preferred units carry an 8% annual distribution rate and rank senior to common equity. PAA also agreed to modify IDRs associated with common units issued upon conversion.
- PAA expected long-term debt-to-adjusted EBITDA to remain above its target range in the near term, with improvement dependent on industry recovery and cash generation from completed projects. PAA’s stated target range was 3.5x–4.0x; the filing does not provide a clear year-end actual leverage multiple in the text supplied.
- Year-end available liquidity was approximately $2.432 billion, subject to covenant compliance. PAA and AAP reported compliance with their debt covenants at December 31, 2015.
- The May 2015 Line 901 release in California had an estimated total cost of $269 million, including insurance recoveries; the remaining gross liability at year-end was $116 million. PAGP had recognized a $155 million receivable for expected insurance recovery, and received a further $69 million in January 2016. The estimate excludes lost revenue and costs not then reasonably estimable; additional claims, fines, penalties and legal costs remain possible. Lines 901 and 903 had no established restart timeline.
- Other risks include regulatory and environmental costs, customer and counterparty credit exposure, interest-rate and currency movements, project execution and permitting, and the possibility that insurance will not cover all losses. The filing also identifies legal proceedings related to Line 901 and other pipeline and facility incidents.
Most important facts for investors to verify
- Whether the Line 901/903 investigations, lawsuits, insurance recoveries and restart restrictions result in costs materially above the recorded estimates.
- Whether PAA’s 2016 preferred financing and asset sales improve liquidity and leverage as intended, and how preferred distributions and conversion affect common-unit cash flows and AAP’s IDRs.
- Whether operating cash flow, distribution coverage and PAA’s distribution level can support PAGP’s distributions amid lower volumes, compressed margins and substantial capital commitments.
- Progress, cost and in-service timing for the 2016 growth projects, and whether new capacity earns returns in regions with excess infrastructure.
- Customer concentration, covenant headroom and the quality and availability of the reported $2.432 billion of liquidity.